I watched a good video last week, which did a good job of explaining simple versus compound interest.
Simple Interest versus compound interest
Simple Interest is the interest that is paid on the principle of the loan. This is in contrast to compound interest which is interest on the principle and interest on the interest.
Simple Interest👇
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Calculating Simple Interest👇
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Amortization Schhedule Simple Interest👇
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Note that interest payments stay the same each year.👇
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However Compound Interest is defined differently👇
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It looks like it the same, but the devil is in the details👇
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Notice The Payments are larger👇😕
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😱Notice the total interest paid is much larger, over a $1000.00 more versus a Simple interest loan.
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🤔Always remember the difference interest paid on interest
Most consumer credit is compound interest, so it works against you
However when it comes to your cash savings inside a whole life policy, compound interest is working for you
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Here is a side by side comparison
As you can see, your cash value savings account grows to a much larger amount inside the whole life policy due to compound interest versus simple interest in a savings account or certificate of deposit.
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As you can see, the difference starts small $1300.00 after 5 years, but by 20 years the difference is $32,000
That’s the power of compound interest working for you.
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Simple Interest is the interest that is paid on the principle of the loan. This is in contrast to compound interest which is interest on the principle and interest on the interest.
✍🏼 Written by Shortsegments, video by Wealth Nation video